Top 100 Digital Agencies 2018: The state of the industry

first published on econsultancy.com

READ THE FULL PIECE HERE

Hitting the top spot in Econsultancy’s Top 100 Digital Agencies 2018 report is Accenture Interactive, the company’s second consecutive year at number one. IBMiX comes in second place and Atos Digital Services in third.

In this article, I’ll look at some trends seen in the 2018 rankings, and discuss key themes and talking points in the industry.

Growth consolidated in Top 10

2018 financial data shows that the Top 100 digital agencies have grown on average 20% year-on-year from £2.3bn in 2017 to over £2.8bn. The Top 5 agencies hold 40% of the entire fee income of the Top 100 whilst over half of the entire fee income is held by the Top 8 agencies alone.

Historical data demonstrates that the dominance of the Top 10 agencies in the ranking is a trend that continues to persist. Over a five-year period, the average net fee income of the Top 10 agencies has steadily increased, whilst the average fee income of the remaining agencies in the ranking has been more or less stagnant.

UX grows as proportion of income; social, SEO and ecommerce decline

Agencies are asked each year to select a primary function. This year, Full Service/ Marketing agencies dominate, with 65% of the total fee income, followed by Design & Build (18%), Technical (15%) and Creative (2%).

The presence of agencies primarily categorised as technical has grown over the last five years. The demand for technical agencies is further evidenced by the fact that technical development, on average, accounts for 24% of fee income from digital work. Creative work commanded the greater share of fee income five years ago, but technical development has outstripped creative since then.

An area of work that has grown in recent years is user experience, which now accounts for an average of 14% of fee income from digital activities. This development goes hand in hand with evolving consumer expectations for personalised experiences.

The proportion of net fee income derived from social media, SEO and ecommerce, on the other hand, has declined. This trend can perhaps be understood within the broader context of increasing consolidation of marketing activity in-house.

Industry highlights and key themes

The following analysis and commentary looks back on some of adland’s defining moments and key themes in 2018.

The disruption of media buying

Transparency issues and changes to programmatic buying practices are radically changing the role of agencies. Based on a 2017 study, the Association of National Advertisers (ANA) reported that 60% of agencies are taking steps to address media transparency within the client-agency relationship.

Concerns about non-transparent practices such as rebates and hidden fees have subsequently fuelled growth in client demand for auditing services. While some clients are taking control of programmatic work, with an ANA report showing that over a third of advertisers are moving programmatic work in-house and away from agencies, this year’s number one agency on the ranking is attempting to capitalise on the market trend by getting into the media buying space itself.

Accenture Interactive launched a programmatic services unit, encompassing media planning, buying and management. Accenture Interactive also offers media auditing and pitch management services in addition to media buying. Issues related to this have not gone unnoticed, with some observers remarking on a conflict of interest at play. Martin Vinter, Head of Media at specialist media consultancy Ebiquity, says:

Whatever firewalls and segregation of media buying and auditing will be in place, it won’t appease anyone. This is clear conflict – operationally and philosophically. In the age of ‘transparency’ – and all that this encompasses – savvy marketers will see that this as a significant issue. Impartiality, whether agency side or consultancy/audit side is crucial for the industry to weed out the issues that have existed in the past. This development unfortunately goes against the grain of recent positive developments.

Agency holding groups refine their propositions as their business models come under attack

2018 was certainly a tough year for some agencies, with Top 100 entrants noting the loss of some clients or the end of contracts. The industry is being disrupted by different forces but are the shifts occurring somewhat sensationalised?

It seems that the industry is riddled with contradictions. On the one hand, there has never been as much money spent on advertising, yet the rise of ad blocking and the challenge for brand cut-through suggest that advertising is now less effective. Fee income of the Top 100 is growing yet the existential threat of agencies is much talked about and lamented.

Are agencies really struggling for survival?

The threat of consultancy disruptors, of course, has received much attention in the last couple of years. However, there are other competing forces at play, most notably the rise of in-housing, the formation of independent collectives as well as the emergence of new sources of competition.

Let us take a closer look at some of the main issues impacting existing agency groups.

1. The third phase of strategic development

Michael Farmer, author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies, contends that holding groups are in their third stage of strategic development. According to Farmer, this third phase refers to centralising and downgrading silos. He puts forward a view that agencies are short of talent and insufficiently integrated or creative, so holding companies are taking over as super-agencies.

This idea mirrors Publicis Groupe’s ‘The Power of One’ strategy or WPP’s concept of ‘horizontality’, a term that represents a model put in place by Sir Martin Sorrell to encourage people in different agency units to work collaboratively in order to offer a broader range of services to specific clients. Most of the agency holding companies have been refining their propositions in some way in recent years.

2018 was marked by the ominous departure of Sorrell from WPP in April. Since the departure of the industry magnate, speculation and prediction has been made about the breaking up of WPP or the consolidation of its agency brands.

Controversy aside, Sorrell’s exit from WPP and the arrival of Mark Read as his successor highlights that the marketing and advertising industries are deep in transition. Luke Smith, Co-Founder and CEO of Croud, says:

The holding companies undoubtedly need to seriously evolve to meet fresh industry demands. And, in the case of WPP especially, this has posed some serious questions over whether an agency of that scale should be restructured to reflect market trends and the current climate.

What does this post-Sorrell world mean for agencies? Perhaps the industry will shift more towards people-based marketing and customer centricity to meet current market demands. For example, agencies have recently been investing in their own proprietary tech, a factor driving further consolidation in the market, and building better audience insight tools to help clients with media and creative work. Clients, after all, are seeking more agile, simplified and flexible arrangements with partners in order to create connected customer experiences in a fragmented media landscape.

Luke Smith also reflects on the cultural implications of these shifts within the industry:

“We’re also seeing the somewhat sad demise of the age of the personalities in the agency world, with Sorrell and Vincent Bolloré having departed and surely a couple of the other leaders not far off. This means the holding companies are in danger of becoming incredibly corporate and faceless with grey offices in Zone 2. A far cry from what agencies used to be known for and this isn’t what attracts young talent.”

Whether or not this sentiment is widely shared, future agency models, at any rate, will continue to evolve. In order to drive change for clients, the agency groups need to alter how they do business with them.

2. In-housing digital

Growing pressure on the client-agency relationship has been a consistent theme for some time but it has never been more apparent than now. There are a couple of reasons why this is the case, including mounting concerns about brand safety as well as the dominance of Google, Facebook and Amazon, which has meant that advertisers are buying directly from tech platforms.

Furthermore, in-house teams are under more pressure to prove marketing effectiveness and drive growth. Econsultancy’s Future of Marketing research backs up this theme, with 60% of advertisers surveyed agreeing that proving marketing effectiveness is more important now compared to 2 years ago. Added to this, ‘maximising the ROI on campaigns’ is considered the top objective for 49% of advertisers over the next five years.

With driving growth in a high-volume world of always-on content at the top of the marketer’s agenda, work is migrating in-house or to lower cost countries – another force competing with agency groups.

3. Seeking solutions – a hybrid model in a complex ecosystem

While in-housing is a notable trend, the demand for solutions is high. Clients are seeking partners to help them navigate the mire of technological change.

A lot of work can be done at scale in-house but the extent of in-housing depends on a brand’s budget and what it is prepared to organise.

Speaking at DMEXCO in Cologne this year, Blake Cahill, SVP Global Head of Digital Marketing and Media at Royal Phillips, suggested that a hybrid model of working with partners, depending on a brand’s business maturity, is the way forward.

Cahill spoke about how Royal Phillips manages a lot of processes, testing and ongoing production internally and how it has flipped its model of partnering with agencies by working with them on strategy first and then creative execution. The brand has also changed its remuneration practices by awarding higher remuneration to strategy and consultancy services.

Not all marketing activity will occur in-house at every brand. Clients may also choose different partners for ideas and execution. While it may be an operational challenge to bring the briefing process and flexible teams together, Cahill argues that a blended approach to partnership ensures that brands develop the best of breed partners for each engagement.

Consequently, we see a very mixed landscape, with agencies, consultancies, big tech platforms, adtech and martech companies as well as newer innovative players all trying to reinvent and compete for the same lines of work.

Indies form their own collectives to compete with industry incumbents

While networked agencies are undergoing a period of transformation, independent agencies are not standing still either.

Independent agencies account for 48% of the Top 100, whilst agency groups represent 52% of the agencies in the ranking. Despite the fairly even split in representation, agency groups hold 76% of the total fee income of the Top 100, whilst independents hold just 24%. One independent agency spokesperson comments on this disparity:

The industry is polarising, with one end being driven by the need to automate and drive down costs. On the other, the drive upwards – taking marketing into the boardroom via digital and operational transformation.

We, like many mid-sized agencies, are pinioned between these two forces – undercut by AI and cheap Asian resource, on the one hand, and outgunned by the mega global consultancies on the other.

Clients, too, are conflicted. Is marketing a commodity to be bought on a cost basis as procurement believe, or is it a strategic growth driver worthy of significant investment? The challenge for a mid-sized independent is to persuade clients that our prices are worth paying and our talents up to muster.

Sadly, smaller agencies still suffer from the perceptions that, as they are smaller, they should be cheaper, when in fact the value they create is significant.

This independent agency spokesperson suggests an opportunity in this middle ground position:

“As the holding company behemoths increasingly flounder to respond to clients’ needs for more agile and responsive vendors, and the biggest consultancies struggle to produce breakthrough insight and creativity, the independent agency offers a flexible (and affordable) alternative, and one capable of forming enjoyable and lasting relationships.”

Another trend developing is independents combining in owner-led groups to offer an alternative proposition. For example, 10 independent agencies joined forces this year to form an owner-driven collective network called Together Group and combine their capabilities on client briefs. Whilst agency groups are restructuring their businesses to respond to various challenges, indies are seeking collaborative models to scale their own capabilities to meet client demands and compete with industry incumbents.

The Facebook / Cambridge Analytica debacle

The arrival of the General Data Protection Regulation (GDPR)5 in May and the Facebook/Cambridge Analytica (CA) data breach scandal marks a turning point for the industry.

The implications of these events for marketing and advertising are heightened scrutiny over privacy and data security issues and a shift in power from advertisers to consumers.

Croud Co-Founder and CEO Luke Smith says:

Back in the day, no one talked about data privacy at dinner parties. However, this chain of events has got people talking about it in homes across the globe, cementing the issue in mainstream conversation.

The marketing and advertising community had already been taking a more cautious approach towards social media platforms even before news of the Cambridge Analytica scandal emerged. Concerns around brand protection, along with the added complications surrounding GDPR implementation, were already making brands think more carefully about their relationship with data-driven ad platforms.

Michael Hewitt, Content Manager at Stickyeyes, thinks that the Cambridge Analytica scandal will probably go down as a mere footnote in the context of marketing and advertising:

Facebook is clearly going on the charm offensive to win back the trust of both users and advertisers. Whilst Cambridge Analytica demonstrated that the gateway between advertisers and users was woefully unguarded, in many respects, at its base level, Facebook did and will continue to operate very much in the way that it was intended to – to provide advertisers with a means to reach micro-targeted audience segments with highly personalised messaging. The adage of “if you aren’t paying for the product, you are the product” is very much what Facebook relies on.

Hewitt believes that Facebook will more than likely come out of this as a more mature advertising and marketing platform. He says that the company will tighten its policies, it will look to raise the standards it holds advertisers and developers to over time and it will more than likely remove or replace targeting options, but the core business will remain the same. He says that whilst many will point to Facebook’s slowing user growth and slump on Wall Street as a sign that this scandal has hit Facebook hard, he believes that those problems are rooted in issues far bigger than Cambridge Analytica.

It remains to be seen whether the CA incident will result in an appreciable migration away from Facebook. If this scenario unfolds, agencies might capitalise on the opportunity to reach audiences with other media types. If government regulation becomes a likely scenario in the future, this could impact the effectiveness of advertising on the platform and brands may shift their media buying strategies.

Yet heightened interest and concern about privacy can only be a good thing for advertising and data-driven marketing. Luke Smith says:

In the long run, I have no doubt that this will help the industry to move on positively. Increasingly, brands will have to make far more effort to forge valuable, two-way relationships with customers that will make for better engagement for all parties.

Talent pipeline concerns remain

Now a somewhat clichéd theme, talent and skills are, once again, major concerns for the industry. How can the marketing and advertising industries ensure that the talent pipeline meets new digital demands?

Julian Ward, Group Head of Talent Acquisition at Stickyeyes, believes that the industry needs to consider how it is raising awareness and educating the next generations of talent about the opportunities that digital can offer, and to think more laterally about the skills and qualifications that are relevant to what the industry does. He says:

We come across many undergraduates and school leavers who are largely unaware that there is a rewarding career waiting for them in the digital industry. We come across mathematics undergraduates who have relatively little understanding of the opportunities available to them in fields such as paid search and programmatic advertising, or school leavers unaware that a digital apprenticeship could offer them more than a marketing-orientated degree.

Given that the demand for digital talent greatly outweighs the supply, Ward believes that it is incumbent on industry professionals to engage with educational establishments and spark passion in the next generation of digital marketers:

Once we secure talent, it is then up to us as forward- thinking organisations to nurture that talent through training and development, to leverage relationships with technology partners to make sure that their talent continues to keep abreast of the ever- evolving digital landscape, and to keep innovating with new ideas that keep people engaged.

The growth of diversity initiatives

Conversations about diversity came to the fore this year, culminating with developments such as the #MeToo and Time’s Up movements against sexual harassment and the #WomenCannes campaign.

Long listed for the Financial Times and McKinsey Business Book of the Year Award, publications such as Emily Chang’s Brotopia have appeared, highlighting inequalities within the tech industry and how women and minorities are speaking out to address the inequalities that exist.

There is evidence that change is occurring within the media and advertising industries, with growth of initiatives and gradual progress regarding diversity and inclusion issues.

It has certainly been another interesting year for the industry.

Top 100 Digital Agencies 2017: The state of the industry

FIRST PUBLISHED ON ECONSULTANCY.COM

READ THE FULL PIECE HERE

Accenture Interactive has come first in Econsultancy’s Top 100 Digital Agencies Report 2017.

The digital consultancy claimed top spot this year with UK fee income of £284 million, a whopping increase of 61% year-on-year. IBM iX, which came top in 2016, dropped to third with SapientRazorfish in second.

In this post, I’ll look at which agencies rounded out the top 10, as well as examining the keys trends that emerged from the report. For example, this year’s Top 100 Digital Agencies Report notes the evolution of agency structures as brand marketers’ sophistication grows and competition heats up in the market.

The Top 10

This year sees the total fee income of the Top 100 digital agencies surpass £2.3 billion. 2017 was undoubtedly a period of success, with agencies reporting on average a 20% growth in total fee income.

A large part of this growth, of course, is accounted for by the agencies at the top of the ranking. The top five agencies now account for 39% of the entire fee income of the Top 100. Half of the total fee income is accounted for by nine agencies alone.

Another flurry of mergers and acquisitions occurred in line with previous years as the industry consolidates further and agencies widen capabilities in an endeavour to become full service. Examples include Capita’s acquisition of Orange Bus, Code Computer Love’s merger with MediaCom and Ayima Group’s acquisition of Quick Think Media.

IBM iX slipped this year from the number one spot to make room for Accenture Interactive. 2017 marks a tremendous year of growth for Accenture, with the company further dominating the marketing and advertising sector as it continues its ambitious acquisition trail.

The acquisition of marketing agency Wire Stone in August marks the company’s 15th acquisition since 2013. Accenture announced earlier in the year that it would spend $1.8 billion on acquisitions to strengthen its global outfit. The company now stands as the largest digital network in the industry, with revenues exceeding $4.4 billion, further elucidating the dominance of this new breed of agency.

2017 challenges

Three challenges in particular were mentioned by agencies entering this year’s Top 100:

1. Brexit and the US presidential election

The political and economic ramifications of the past year’s events have resulted in companies focusing on healthy growth in each quarter. There are concerns among agencies and brand marketers about the impact of Brexit on retaining a very European workforce as well as its impact on general trade conditions.

Some agencies fear that the reduced appetite for commercial risk, investment and marketing experimentation might pose a threat and that reduced budgets and a drop in the pound will continue to bite in 2018.

2. The General Data Protection Regulation (GDPR)

Understanding the impact of GDPR and upcoming data privacy law changes due to come into effect in May 2018 are a cause for concern this year. While some agencies consider these changes as potentially hampering the targeting and reach of customers, others believe they are an opportunity to improve customer interaction and engagement, enabling their clients to succeed.

3. Transparency and viewability

Agencies referred to the growing scepticism in programmatic and display advertising, noting clients’ viewability, click fraud and ad blocker intervention concerns. Brand safety and ad viewability are top concerns in the industry.

But it’s not all doom and gloom…

Opportunities highlighted by agencies include:

1. Acting as sense maker

As the marketing technology onslaught continues, adding further layers of complexity to the marketing ecosystem, agencies have the opportunity to act as trusted partners in advising on the applications of new waves of tech. Tech utilisation and data analytics are highly valued areas of counsel by brand marketers.

2. The shift to guiding transformations 

Many agencies entering the Top 100 this year noted their adoption of a consulting mindset and the changing skillset required of agencies. Agencies are now shifting from being vertical specialists to being high level, broader T-shaped people. Agencies are no longer simply responding to client briefs but are instead focusing on helping clients find problems to solve, offering diagnostic capabilities and solutions.

3. Capabilities development and training

The trend of skills being developed and improved in-house on the client side as well as the continuous supply of new technologies means that agency engagement with clients is shifting to capabilities development and knowledge transfer as well as training in-house teams.

Game of Agencies – battling it out for market penetration

Consultancies and systems integrators have continued to muscle in on agencies’ territory in 2016/17 in what has been a Darwinian period for the industry. It’s a tough and competitive environment, with some agencies battling for survival and losing out to consultancies in winning large digital and marketing transformation work.

What complicates things further is that the digital agencies landscape is no longer comprised of consultancies and traditional holding companies. E-tail giants, tech players, media companies, publishers and even mobile carriers are now also competing for the same lines of business. So this begs the question: who will prevail in this Game of Agencies? The winners in the future could very well be something entirely new.

Traditional shops are beginning to fight back and adjust to this new normal by building their own business transformation units to better compete. Take the media arm of French ad holding company Publicis Groupe, for example, which launched its own global business transformation practice in 2016.

While traditional agencies and independents have been making strides in consulting and offer the creativity, agility and cost-effectiveness that consultancies sometimes lack, there is no real threat to the consulting giants just yet. The consultancies’ access to the C-suite, deep vertical industry expertise, global offices and manpower are certainly advantages. Furthermore, the rationalisation of agency relationships where brand preferences are towards fewer and deeper supplier relationships is a trend that favours the big consultancies over agencies.

One thing is certain: with consulting firms acquiring digital, creative and design expertise and traditional agencies developing consulting, data and technology capabilities, agency value propositions are indeed changing. Left brain is meeting right brain in the industry and it is this ‘systems/empathy convergence’ that will shape the future of agency capability.

Talent wars

To survive in this competitive environment, skills need to be smart and deep and teams of specialists are required.

Attracting and retaining the right talent, however, is one area that agencies continue to struggle with. The talent problem was the most cited challenge among agencies in entry submissions this year and is, without doubt, one of the main barriers to digital progress.

As one agency noted:

Retaining and attracting talent in a market where demand for digital capabilities is ever-increasing will be paramount to agencies’ success. Clients are also now expecting analytics to prove success and challenging agencies to tell a complete story across multiple touchpoints.

Diverse teams of people with the right skills is important for agencies seeking to differentiate themselves through strategy, specialisation and digital expertise but this very often requires staff who are expensive and nomadic. A large part of the challenge is due to the pressures of short-termism; in developing talent and resourcing to keep up with client demand for services as well as international expansion.

The skills shortage is manifesting itself in areas such as data science but also in digital design. One agency highlighted the opportunity that this brings for people with in-demand skillsets:

The market is exploding for digital design again, and technology is available to everyone and every agency in a way that has never been seen before. The choices for young designers who are comfortable and experienced in bringing tech and design together are exponential. Allowing people to flex their creative muscle whilst constantly working in beta and black and white is sometimes difficult.

Agencies also noted the challenges in attracting diverse talent. The media furore surrounding the controversial anti-diversity memo written by ex-Google employee James Damore, in which he presented contentious views about women being less skilled than men in tech, is perhaps an illustrative example of the wider concerns about gender diversity in the industry.

So what are agencies doing to tackle the skills gap? Some noted the establishment of collaborative and agile working practices, organising graduate and apprenticeship training schemes as well as nurturing talent through continuous learning. One agency said:

We believe in a company culture that encourages continuous learning, and so strengthening the learning and development opportunities we provide will be key to attracting the best talent.

Agencies on the latter half of the Top 100 ranking, as they continue to grow and surpass teams of 50+ and 100+ people, have highlighted their need to balance expansion and growth with maintaining their unique culture and attracting talented employees. These agencies are finding that organisational purpose and culture are just as important as remuneration and location in the search to recruit and retain the best talent.

In-house agency vs. on-site agency

The client-agency relationship is changing. One factor contributing to these changing dynamics is clients increasingly moving more agency functions in-house. More brands are bringing their digital strategy and production in-house, creating digital centres of excellence at client office locations.

Transparency issues and a tighter rein on spending are at play here but other reasons for moving in-house and consolidating agency rosters relate to efficiency, agility and speed. Brand marketers often have a better understanding of their brand and audience than external agencies and so the move in-house is increasingly resulting in better work, particularly in the creative space, as well as better bottom-line results.

The most obvious benefits of in-house agencies are that talent is owned and not rented and total integration is possible, with brands having the opportunity to align the capabilities of the agency to its needs in a way that is not possible with an external agency.

However, there are some downsides. While the decision to create in-house agencies is often taken with the aim to improve efficiency, in-house teams can sometimes lack perspective and a wider sense of context. This year’s Pepsi Kendall Jenner ad, which was heavily criticised for appearing to trivialise the Black Lives Matter movement, exemplified some of the pitfalls of the in-house agency. The insularity of the in-house agency model can sometimes result in losing touch with the realities of customers.

The Jenner ad therefore reignited the in-house agency vs. on-site agency discussion. An alternative to the in-house model is the on-site agency in which agency employees work on site at a client’s office but are integrated into the culture and operations of the brand. This rise in shared workplaces and co-location has many advantages including greater flexibility, higher productivity and the ability to quickly scale up or scale down depending on client needs. On-site agencies offer a middle ground between an external agency and an in-house agency and can therefore be seen to offer the best of both worlds.

Nevertheless, the model is not perfect and may not always be considered as the superior option. For example, an on-site agency is rented and not owned and external vendor risk still exists in the sense that a client is dependent on the agency’s financial health and ability to recruit talented staff. The model that brands should choose if they forgo the traditional external agency model will largely depend on its capabilities and its ability to work well with each type of agency, whether that means investing in the right talent for an in-house agency or working towards true integration if taking the on-site approach.

The rise of modular agency structures

The move in-house and the rise in co-location reflects shifting agency models more generally. Disintermediation is another shift that continues to impact traditional agency structures with more brands going direct to influencers, tech vendors and media companies, essentially cutting out the middleman.

Furthermore, as integrating marketing efforts continues to be a challenge, brands are seeking a more simplified agency model, one where there are fewer agencies or one lead agency to guide multiple agencies in an integrated fashion.

This type of solution has already manifested itself in something like Omnicom Group’s multidisciplinary on-site offering for McDonalds. This model is an example of a holding group solution for the future where one core agency has several partners such as media companies or tech platforms, for instance.

Related to this is the growing trend of modular agency networks such as the agency structure of Publicis Groupe, for example. In this type of model, there are fewer of the same types of agencies, resulting in a reduction in overhead but allowing agencies to rebundle capabilities to serve a client’s specific needs and making cross-functionality and integration more effective.

Agencies are therefore becoming smaller, less siloed and more specialised. In the coming years, we may also see a rise in revenue-based compensation models to meet the demands for more accountability and tracking agency work to sales.

Heading into the future, it is likely that agencies will also be more distributed, working with talent all over the world via virtual collaboration, utilising remote working practices and rented office spaces as well as taking full advantage of what the gig economy has to offer.